Monday, May 23, 2011

Anatomy of Money Creation in Singapore 1

Having received feedback from my previous blog regarding M1 money supply, I decided to delve deeper into the topic. I need to apologize as my previous blog is kind of extreme.

Put it simply, Singapore dollar is created when Joe goes to MAS trading his foreign currency for SGD. MAS simply creates the money and give it to Joe.

This is the reason our government claims SGD is backed more than 100% by FX. The real money creation mechanism is of course much more complicated and our government makes it clear that SGD is peg to the exchange rate of a basket of currencies.

The US Fed starts to print money since 2008, MAS prints in tandem when hot monies flows to Singapore. This is the reason of hike in M1. In other words, US action has forced MAS to debauch our currency as well so as not to erode our competitiveness.

Our elite is well aware that the increase in M1 spell inflation for Singaporean, which is the main reason of property bubble. They are not responsible to the sin of US Fed but are guilty of--

Allowing property bubble to develop even further. (a few regulations here and there will simply mitigate the bubble)

Failed to provide proper hedging for CPF, for example they can give us an option to convert CPF monies to 100% physical gold. The elite should be well aware that Fed QE can be fully hedge by gold.

5 comments:

M1 does not determine the rate of inflation. In fact, there is no correlation between inflation and base money supply in most developed economies. It is the *total* money supply that is related to inflation. This is something most central banks control through interest rates. MAS is a little different since it uses exchange rate to control inflation.

The inflow of money is not solely due to the monetary expansion in the US. There were similar monetary expansion policies in Japan, China and the OECD countries. In fact, credit expansion was proportionally larger in China.

MAS was stuck between a rock and a hard place with the USD, Yen and RMB flowing in. To be fair, it wanted those money to come in because Singapore is trying to be a financial hub and you can't restrict capital inflow if you want to be a financial hub. I can imagine MAS frantically selling Singapore government bonds in its attempt to sterilize all that hot money.

It could have either let the SGD appreciate against the USD (and screw exporters/manufacturers in the process) or kept the SGD within a lower trading band (and allow inflation to grow). The end result was a little bit of both although the current policy is to go for steady controlled appreciation.

The SGD is not backed only by FX. It is backed by gold, equities, FX and securities. In fact, it is probably mostly in equities and securities. That is what GIC is for: to invest our foreign reserves in equities and securities. Singapore probably does not hold much FX.

You can't just say that you disagree with the claim that there is no correlation between base money supply and inflation. You have to show us the data. For example, you can compute the normalized cross-correlation between inflation and the percentage change in base money supply. If it is close to one, ten you have a case.

Unfortunately, such empirical studies have been conducted numerous times. It has been found again and again that changes in CPI and base money supply are only weakly correlated (in Malaysia, Taiwan, Singapore, US, Canada, etc). The normalized cross-correlation is something like 0.2 or less.

This is because central banks can do other things like adjust interest rates, prime rates, capital reserve requirement, etc. Base money supply is only but one of the variables that determine TOTAL money supply.

////It has been found again and again that changes in CPI and base money supply are only weakly correlated (in Malaysia, Taiwan, Singapore, US, Canada, etc). The normalized cross-correlation is something like 0.2 or less. ////Re:That must be a scam. You believe in that?

///////////Base money supply is only but one of the variables that determine TOTAL money supply.///////////Re:Please go back and study ECONS 101. People do not call base money as "high-power money" for nothing.